employee class exclusion

Employer has had 6-month wait to enter the plan, no hour requirement, just elapsed time.  This pulled in several part-time employees who work <1000 hours.  They have no balance in the plan.  The participant count went over 120 as of 1/1/2020 and so will be audited for 2020.  The plan was been amended to exclude part-time, seasonal, temporary defined as those scheduled to work <1000 hours effective 1/1/2021.   The intent then is to exclude these employees prospectively from participation as of 1/1/2021 - no longer covered under the plan and thus not included in the participant count.

Example: an employee who always worked <1000 hours was eligible in 2020 and has no plan balance.  The 2021 amendment is intended to exclude this employee from participation in the plan effective 1/1/2021.  I think this is ok.  Comments?

Thanks in advance.

While eligibility is not a protected benefit I don't believe you can retroactively amend the plan back to 1/1/2021. The Eligibility change would have to be prospective, that is a date after the amendment is actually signed.

Thanks Lou.  The amendment was done prospectively on time.  But thank you for commenting that eligibility is not a protected benefit.  That confirms my thinking.

Keep in mind the long-term part time employee rules that will take effect next year.

BG5150 reminds us of an important caution.

If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing, or for other plan-administration reasons—organize two distinct plans: (1) a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and (2) another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii).  One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations.

Using two plans also might help avoid a need to engage an independent qualified public accountant.

Without waiting, a plan’s administrator should consider its disclosure duties to part-time employees who could, with enough service, become eligible.  In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873, 1880-1881 (Feb. 21, 1989), the Supreme Court, interpreting ERISA § 3(7), held that a participant—to whom ERISA § 104(b)(4) and other provisions set disclosure duties—includes an employee who could in the future fulfill the plan’s eligibility conditions.